Valuation, adverse selection, and market collapses

Michael J. Fishman, Jonathan A. Parker*

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

20 Scopus citations


We study a market for funding real investment where valuation - meaning investors devoting resources to acquiring information about future payoffs - creates an adverse selection problem. Unlike previous models, more valuation is associated with lower market prices and so greater returns to valuation. This strategic complementarity in the capacity to do valuation generates multiple equilibria. With multiple equilibria, the equilibrium without valuation is most efficient despite funding some unprofitable investments. Switches to valuation equilibria, valuation runs, look like credit crunches. A large investor can ensure the efficient equilibrium only if it can precommit to a price and potentially, only if subsidized.

Original languageEnglish (US)
Pages (from-to)2575-2607
Number of pages33
JournalReview of Financial Studies
Issue number9
StatePublished - Sep 2015

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


Dive into the research topics of 'Valuation, adverse selection, and market collapses'. Together they form a unique fingerprint.

Cite this